W&T Offshore Inc

NYSE:WTI

Earnings Call Analysis

W&T Offshore Reports Strong Cash Flow and Production Recovery Expectations

In its Q3 2024 earnings call, W&T Offshore highlighted a solid position with $54.9 million in year-to-date free cash flow and a significant reduction in net debt to $266 million. Following hurricane-related disruptions, production improved to 34,000 barrels per day in October, with fourth-quarter guidance set at 33,600. Cost management remains a priority, with lease operating expenses below expectations at $72.4 million. The company will invest $25-35 million in capital expenditures for 2024, focusing on maximizing existing field production. W&T also continues to engage in strategic acquisitions, bolstered by a strong balance sheet and a commitment to shareholder returns through dividends.

Strong Financial Performance Amidst Challenges

W&T Offshore showcased a robust third quarter in 2024, generating a significant free cash flow of $54.9 million year-to-date. The company has successfully maintained this positive cash flow for the past seven years, illustrating its operational efficiency and strong cash management. Adjusted EBITDA reached a solid $122 million, indicating healthy profitability despite the pressures from an active hurricane season which led to production being temporarily shut in.

Production Levels and Future Guidance

During the third quarter, W&T Offshore's production averaged 31,000 barrels of oil equivalent per day. This was adversely affected by the hurricanes, leading to a loss of about 3,500 barrels per day. However, production levels have shown improvement in October, rebounding to approximately 34,000 barrels of oil equivalent per day. Looking ahead, the management has provided guidance for the fourth quarter, projecting a production midpoint of 33,600 barrels daily—a slight increase attributed to expected better weather conditions.

Cost Control and Operational Efficiency

Managing costs has been a priority for W&T Offshore, with lease operating expenses totaling $72.4 million in the third quarter, coming in 6% lower than the guidance range. This focus on cost control, combined with efforts to enhance synergies from recent acquisitions, has bolstered the company's cash flow and allowed for continued debt reduction—net debt now stands at $266 million.

Strategic Investments and Acquisitions

In terms of capital expenditures, W&T invested approximately $9.5 million in the third quarter and $23.3 million for the first nine months of 2024, which is indicative of a cautious yet strategic approach. Full-year 2024 CapEx is expected to fall between $25 million and $35 million, down from previous expectations, focusing primarily on projects aimed at optimizing production in existing fields. The acquisition of Cox assets is also underway, with successful integration efforts to increase production from these.new fields in the coming years.

Focus on Shareholder Returns and Sustainable Practices

W&T Offshore is committed to returning value to shareholders, having consistently paid dividends for four consecutive quarters. The company has also placed a strong emphasis on environmental sustainability, achieving an excellent safety record—zero recordable incidents reported in 2024. This commitment to safety complements their dedication to improving ESG metrics, which is becoming increasingly crucial in the energy sector.

Market and Regulatory Environment

The current acquisition market remains uncertain, influenced by upcoming elections and regulatory challenges. W&T is strategically positioning itself for potential increases in acquisition opportunities and drilling activities in 2025. Regulatory hurdles, notably those related to environmental policies, could impact operational capabilities, particularly in the Gulf of Mexico, where the company manages significant assets.

Leadership’s Confidence and Outlook

The leadership, particularly CEO Tracy Krohn, remains optimistic about W&T Offshore's future, highlighting a strong balance sheet and cash position that enhances options for future growth, including potential further acquisitions. The alignment of management's interests with shareholders—given their significant equity stake—reinforces confidence in the company's strategic direction and operational execution, setting a positive tone for the upcoming year.

Earnings Call Transcript 2024-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the W&T Offshore Third Quarter 2024 Conference Call. [Operator Instructions] This conference is being recorded, and a replay will be made available on the company's website following the call.

I would now like to turn the conference over to Al Petrie, Investor Relations Coordinator.

[Al Petrie, executive]

Thank you, Megan. And on behalf of the management team, I would like to welcome all of you to today's conference call to review W&T Offshore's Third Quarter 2024 Financial and Operational Results.

Before we begin, I would like to remind you that our comments may include forward-looking statements. It should be noted that a variety of factors could cause W&T's actual results to differ materially from the anticipated results or expectations expressed in these forward-looking statements.

Today's call may also contain certain non-GAAP financial measures. Please refer to the earnings release that we issued yesterday for disclosures on forward-looking statements and reconciliations of non-GAAP measures.

With that, I would like to turn the call over to Tracy Krohn, our Chairman and CEO.

[Tracy Krohn, executive]

Thanks, Al. Good day to everyone, and thank you for joining us on our conference call. So with me today are William Williford, our Executive Vice President and Chief Operating Officer; Sameer Parasnis, our Executive Vice President and Chief Financial Officer; and Trey Hartman, our Vice President and Chief Accounting Officer. They're all available to answer questions later during the call.

So we continue to report solid operational and financial results while continuing to execute our strategic vision. Our focus is always on generating free cash flow while maintaining and optimizing our assets, including the assets that we acquired in the first quarter of this year. Through September 30, 2024, we've generated free cash flow of $54.9 million on a year-to-date basis. For the past 7 years, we've generated positive free cash flow, and it's because we operate very efficiently and know that cash is paramount to our success. Our balance sheet continues to improve as we're delivering meaningful adjusted EBITDA, which year-to-date totaled $122 million.

So I'd like to begin our operational discussion by focusing on production. In the third quarter, production was 31,000 barrels of oil equivalent per day. Our production was impacted by an active hurricane season in the Gulf of Mexico seems that continues as we speak. Thus, we saw about 3,500 barrels of oil equivalent per day shut-in associated with hurricanes and other downtime. Despite this, our production was within our guidance range. And the majority of this production has been restored with our October production rate at around 34,000 barrels of oil equivalent per day.

In addition, we continue to optimize production that we acquired in Q1 2024. However, only four of the six fields are currently online. We're working diligently to return the remaining two fields to production, which should provide a boost to production in 2025. With over 40 years of experience integrating acquisitions into our asset base, we've proven that the near-term costs are well worth it to realize the long-term potential of the newly acquired assets generating cash flow for us for many years to come.

So turning to costs. Our lease operating expenses for the third quarter 2024 were $72.4 million, which was below the bottom end of our guidance range by 6%. In fact, costs were down 2% compared to the second quarter 2024. Our continued attention to controlling costs and capturing synergies from our acquisitions helps us to generate strong free cash flow, pay down debt and build our cash balance. At the end of the third quarter, our cash on hand rose to $126.5 million, and we lowered our net debt to $266 million. We also continued returning cash to our shareholders paying our fourth consecutive quarterly dividend in August, and we announced the fourth quarter 2024 payment will occur later this month.

In our earnings release, we provided our fourth quarter guidance. We're projecting production to increase compared to the third quarter due to less hurricane and related downtime. Fourth quarter 2024 production guidance has a midpoint of 33,600 barrels of oil equivalent per day. Again, we do have a storm out in the Gulf of Mexico, kind of meandering around. We're not quite sure how that will affect us or even if it will affect us at this point in time. We plan to spend a little more on lease operating expenses in the fourth quarter as we undertake some of the projects we deferred earlier in the year, and we continue to bring on the other two new fields back online to help increase operational and financial results.

For CapEx, excluding acquisitions, we invested about $9.5 million during the quarter, and about $23.3 million in the first 9 months of 2024. In addition, we invested $80.6 million in acquisitions year-to-date.

So now we plan to invest about $25 million to $35 million in full year 2024, excluding acquisitions. This is down about $10 million at the midpoint from our prior 2024 estimate. These expenditures are directed primarily to facilities projects in our existing fields, and the new fields acquired in late 2023 and early 2024 to maximize and optimize production.

So as you can see, our ability to execute operationally continues to help us build cash, reduce net debt and further strengthen the balance sheet. We're in a very good financial position as we close out 2024, and we remain focused on operational execution to build on these solid results.

Regarding the Cox asset acquisition, we've had good execution toward integrating these -- to integrate these assets into W&T. We still have more work to do that should help to increase production from these new fields. We hired select Cox Offshore personnel while completing all regulatory transfers of operatorship, lease ownership and financial responsibility. Our team has worked really hard integrating accounting, production reporting, cost tracking and other data into existing W&T systems. Those records weren't really in that good order in recognizing that these assets were bought out of bankruptcy and the company was indeed bankrupt and getting some of this data has taken a little bit of time to assimilate and put in a proper order so that we can maintain it going forward.

In addition, we've worked to inspect all aspects of the field to ensure W&T's health, safety and environmental standards are implemented, and we're negotiating midstream services at the newly acquired fields. Safety is a key component to our ongoing commitment to ESG, and 2024 has been an outstanding safety year. Despite all the hurricanes and shut-ins, and restarting production in the third quarter, we had 0 recordable safety incidents. In fact we've not had an employee recordable incident in the entire year. And our overall TRIR rate for 2024 is 0.09, one of the latest -- one of the lowest in our long history.

So W&T's culture of success and sustainability is built on environmental stewardship, sound corporate governance, and contributing positively to our employees and the communities where we work and operate. We've made a concerted effort in addressing shareholder concerns and improving our ESG metrics. Our ongoing sustainability commitment and additional details regarding our recent accomplishments can be seen in our 2023 ESG report that we issued in the third quarter.

I'm also proud to announce that W&T was named as a finalist for the Best Proxy Statement in the small cap category at the 18th Annual Corporate Governance Awards which recognize outstanding achievements in governance, risk and compliance. We are honored to receive this recognition, which serves as a testament to our dedication to shareholders to deliver clear, comprehensive and accessible communications. We believe in open communication with our stakeholders and directly engage our largest shareholders to ensure alignment. And by the way, we didn't accomplish first place we did get on the podium at P2.

So in closing, I'd like to sincerely thank our team at W&T as we're well positioned to add value in 2025 and beyond. We got cash on the balance sheet, strong balance sheet and robust cash position enhances our optionality to potentially acquire more complementary Gulf of Mexico assets to enhance the scale of W&T. Our acquisitions remain a key component of our success, and it's our ability to integrate and enhance the assets that we acquire that has allowed us to grow reserves and production over the past 4 years.

We also remain committed to increasing shareholder value and returning value to our shareholders through the quarterly dividend program that we initiated in November of last year. We believe in our proven strategy and as the company's largest shareholder, I believe W&T is very well positioned to succeed going forward. Our entire management team's interests are highly aligned with those of our shareholders, given our 34% stake in W&T's equity, which is one of the highest of any public E&P company. We're focused on operational excellence and making and maximizing the cash flow potential of our asset base.

So with that, operator, we can now open the lines for questions.

[Operator]

[Operator Instructions] The first question comes from John White with ROTH Capital.

[John White, analyst]

Congratulations on following your plan. You're generating free cash flow, integrating your recent acquisitions and reducing debt. With not a lot of drilling activity going on, you want to offer some generalized comments on what you're seeing in the acquisition market?

[Tracy Krohn, executive]

Sure, John. Yes, things are in a bit of flux. I think people were standing down a little bit, trying to figure out what was going on with the elections. And we think that, that's a positive for our industry. Drilling has been a challenge in the Gulf of Mexico, primarily due to regulatory requirements. So there's more than one lawsuit out there dealing with regulations that seem to be a penalty to our industry. So hopefully, that will get sorted out a bit more and make it easier to have line of sight on additional drilling. And we certainly will take that into consideration. We're working on our budget as we speak, and we'll be able to address that in a more concise manner going forward. We do have wells that we want to get drilled, and this will help us with trying to estimate economics going forward.

[John White, analyst]

And you said the acquisition market has been in flux, waiting on the outcome of the election.

[Tracy Krohn, executive]

You bet. People are trying to figure out what pricing is and what their properties are worth. We are faced with the same responsibility. So I think that you'll see an uptick in acquisitions certainly through the first and second quarters of next year. And we see some things that are attractive. We also see some drilling opportunities that are attractive, and we'll be working on some other things as well.

[Operator]

[Operator Instructions] The next question comes from Jeff Robertson with Water Tower Research.

[Jeffrey Robertson, analyst]

Tracy, the two fields that are still shut-in from the Cox acquisition, can you talk about the production mix and what kind of production contribution you would expect when those deals come back on?

[Tracy Krohn, executive]

Yes, it will be several thousand barrels a day. One of them is more technically oriented with equipment at all, and the other one is more of a legal challenge. And I'm not going to address the legal challenge part of it. The operational issues aren't too hard to overcome, and I think we'll -- one of them will be back online in the near future, probably within the next week or 2.

[Jeffrey Robertson, analyst]

And the mix between oil and gas?

[Tracy Krohn, executive]

Yes, it's mostly oil.

[Jeffrey Robertson, analyst]

Okay. For -- just to follow up to, I guess, John's question, does the election resolve some issues that help further your -- the potential formation of a drilling partnership?

[Tracy Krohn, executive]

Again, well, hope so. Yes. I think we're getting a lot of resistance mainly because of -- I shouldn't say a lot. We're getting some concern with regard to regulatory issues. There's an issue out there with the Rice's whale that caused the government to draw a large band between Florida and Texas to which we weren't allowed to run our boats at night. And we weren't allowed to run during the day more than 6 miles per hour, and it would have affected our production quite a bit. There is a challenge to that lawsuit. Now those orders are in abeyance at this point. But yes, I mean, there is a big concern that this is going to affect our operations.

And incidentally, it was only germane to oil and gas companies. So apparently, cruise ships and commercial fishing vessels and recreational vessels don't hit whales. It's only oil and gas companies that hit Wales. So we thought that was a little absurd and still do.

So we're -- clearly, this was an attempt to stymie production in the Gulf of Mexico as the previous administration, seemingly would want to do, why else would be restricted it to just the oil and gas business. So hopefully, that will get straight down in the court, and reasonably, you would think it would. As far as the other lawsuit with regard to financial assurance, the governments or the tax payer never come out of pocket to abandon any field in the Gulf of Mexico.

So the government has -- and I say the government, it's the regulatory arm that deals with the Gulf of Mexico, that have required financial assurance the Gulf of Mexico really since the Obama administration. And it's created a problem, in getting that capacity. There have been some bankruptcies in the Gulf of Mexico that have affected the surety market. And surety markets are a little bit muddled right now as to what to do.

So we, by the way, have done over $1 billion of abandonment in the Gulf of Mexico since inception, and we've never failed to meet all of our obligations. We feel like financial assurance in the Gulf of Mexico since we have -- as an industry, we're joint and separately liable on all of these leases for the abandonment -- of same. And that's part of -- that's the biggest reason why there hasn't been an issue with regard to plugging and abandoning all of these wells. That's the point of the financial assurance.

But since it never has happened, there's no reason to have this financial assurance, we think. We see this as punitive to the industry. We see it as a solution to a problem that doesn't exist.

That's a kind of long-winded explanation, but...

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Tracy Krohn, Chairman and CEO, for any closing remarks.

[Tracy Krohn, executive]

Thank you, operator. Yes, we'll be back with you in the not-too-distant future. We've got a lot of things going on, and we are encouraged. Production is down a bit, but some of that stuff we can't control. Hopefully, this next little storm out in the Gulf of Mexico is going to fizzle out, and although the weather reports have it going in different directions, so we want to make sure that we don't put our personnel in harm's way. But anyway, we'll be back with you shortly, and thank you so much for your attention.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.